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Borrowers Find System Open to Conflicts, Manipulation

And even as accounting firms have curtailed offering consulting services to their clients to avoid conflicts, some credit raters have begun to sell their own consulting services, raising concerns that clients may feel pressured to buy them.

For their part, the credit raters say they ably manage potential conflicts. They say they adhere to strict codes of conduct, such as prohibiting any link between the pay and bonuses of their rating analysts and the fees that come in from the companies those analysts rate. The rating companies also say they perform a public service by allowing investors to compare the relative risk of buying bonds from almost any seller.

About This Series

Unchecked Power: The world's three big credit-rating companies have come to dominate an important sector of global finance without formal oversight. The rating system has proved vulnerable to subjective judgment, manipulation and conflicts of interest, people inside and outside the industry say.
Moody's Close Connections
When Interests Collide
Graphic: The Rating Game

Shaping the Wealth of Nations: As more countries rely on the bond markets to raise capital, they have been forced to accommodate the three top rating firms. The credit raters often have more sway over foreign fiscal policy than the U.S. government.
Transcript: Post Writer Alec Klein
Smoothing Way for Debt Markets
Graphic: Moody's Expansion

Flexing Business Muscle: Lack of oversight has left the rating companies free to set their own rules and practices, which some corporations say has led to abuses. The credit raters have rated companies against their wishes and ratcheted up their fees without negotiation.
New Choices for Consumers
Graphic: Raters' Big Misses

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And the credit raters say their success over time shows the ratings process works, and that their ratings bring stability to the markets, giving companies and countries access to capital. "Our ratings are essentially a public good," said Frances G. Laserson, a Moody's spokeswoman.

Laserson also said that The Post was raising questions about a small number of cases among thousands of Moody's ratings.

Million-Dollar Decisions

The rating companies say they do their job without regard to the impact, basing their ratings largely on statistical calculations of a borrower's likelihood of default. Subjective factors sometimes come into play, rating officials say, given that there are some two dozen categories ranging from the best, "AAA," to a low of "C" or "D."

That subjectivity can be costly. For a borrower, the difference of a single rating notch could mean millions of extra dollars in interest payments.

Few question the need for a credit-rating system, but many argue that the big rating firms have become too powerful and insulated. In the past decade, the industry has been scrutinized by regulators and policymakers, but no action has been taken to strengthen oversight.

"Here we have a huge issue that has a significant impact on the U.S. economy and the global economy, and nobody seems to be paying attention," said James A. Kaitz, chief executive of the Association for Financial Professionals, which represents more than 14,000 U.S. corporate finance officials.

The association and its counterparts in Britain and France issued a statement in April saying investors have lost confidence in the credibility and accuracy of the big three's ratings and called for a new global code of conduct.

Last year, the Investment Company Institute, whose members include more than 8,000 mutual funds and other investment firms, recommended to regulators that the major rating companies disclose conflict-of-interest policies.

The rating companies officially fall under the purview of the Securities and Exchange Commission. But even as the SEC has clamped down on accountants, stock analysts and investment bankers, the regulator has not imposed rules on the rating companies. The SEC, which declined to comment for this article, said it continues to study the issue.

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